Bank Lawyer's Blog

MasterCard "Going Public"

Reuters reports that MasterCard plans to go public. Currently, MasterCard and Visa are "membership corporations" or "associations" that are owned by the member banks who issue their cards. According to press reports, the member banks' voting control will pass to the public shareholders, who will have 83% of the total voting rights and 49% of the equity. Member banks, who are existing shareholders, will retain voting rights through a separate Class M stock that will entitle them to elect "several directors," and will own 41% of the equity through Class B non-voting common stock. The remaining 10% of equity ownership (and voting rights) will be held by a new MasterCard charitable foundation.

We'll see if the passing of voting control of MasterCard to the public takes the wind of the sails of pending class action lawsuits filed against MasterCard that allege that the member banks that control MasterCard (and Visa) conspired to keep interchange fees charged by the card companies to merchants artificially high. In addition to "cashing out" some of the member banks' ownership interests (through the redemption of some of the existing Class B stock held by the banks), the IPO also appears to give MasterCard a capital raising vehicle to acquire competitors. Since the card companies were recently forced, by US government's anti-trust action, to permit their members to also issue American Express and Discover cards, many observers have expected consolidation in the market to occur. Therefore, this may be a smart move to get the jump on their competitors.

Obviously, we'll be watching Visa's response.

Don't Call Me, I'll Call You

I've assisted banks (and other types of clients) in complying with the "do not call" and "junk fax" laws at both the state and local level. Nevertheless, when last year, the U.S. 10th Circuit Court of Appeals' upheld the constitutionality of the federal "do not call" registry (a decision that the U.S. Supreme Court refused to review on appeal), I was pleased. This is an area where my personal and professional interests diverge.

In the appeal of the decision to the Supreme Court, the telemarketers' attorney, Robert Corn-Revere, declared, "[t]his case is a cautionary example of what happens when federal agencies allow perceived political imperatives to override constitutional concerns."

No, Bob, it's a vote for sanity in a world where we escape to the refuge our homes, only to be bombarded by unwanted intrusions into our personal privacy and sense of serenity by telephone calls from outsourced hucksters with accents impenetrable by even blades of cobalt steel. If I want to hear your clients yapping at me, I'll not sign up for the Do Not Call list. You have the right to exercise "commercial speech," but subject to more limitations than can be imposed on the exercise of non-commercial speech. That's well-settled law. One of those restrictions, now, Bob, is you can't call me at home to try to sell me "stuff" when I've told you not to call me at home. The First Amendment will survive, Bob. Seriously, it will.

Believe me when I tell you, Bob, no telemarketer who has experienced the full flavor of a ranting Kevin, interrupted from his dinner by a "outsourced foreign national" unsuccessfully attempting to correctly pronounce the phrase "for this week only" so that Kevin can understand it, would EVER object to the existence of a Do Not Call list with Kevin's name on it. Trust me.

Massachusetts Supreme Court Validates Use of Loan Purchaser's Business Records To Establish Debt

In a decision that relieved a case of potential "legal heartburn" for attorneys who represent purchasers of loans, particularly those whose clients purchase loans made by banks that cease to do business, the Massachusetts Supreme Judicial Court ruled earlier this month that loan purchasers can use their own business records to establish the amount of the debt owed by a borrower, and do not have to produce evidence of the originating bank's (and those of any intervening owner's) business records.

Beal Bank, SSB v. Eurich, involved the 1996 purchase by Beal Bank, SSB (a Texas state savings bank headquartered in Plano, Texas) of a mortgage loan from a California national bank, which in turn had been assigned the loan by the Resolution Trust Corporation as the receiver for a failed savings and loan association. Beal Bank foreclosed on the mortgage collateral and, in 1997, sued the borrower for the deficiency owed on the note. At trial, Beal Bank produced, as evidence of what was owed on the note, two computer printouts created by its loan servicer. The trial judge admitted the computer printouts as "business records of the bank" under the business records exception to the hearsay rule. The trial judge found in favor of Beal Bank, and the borrower appealed. The Massachusetts Court of Appeals reversed the trial court, and was itself reversed by the Supreme Judicial Court.

The Supreme Judicial Court recognized  the "great importance" to mortgage lenders and financial institutions of the problem of proving a debt that has been assigned more than once. This is of especially critical importance in cases where the FDIC might assign loans originated by failed banks, whose personnel with knowledge of their record keeping practices of the originating bank may no longer be available or even known at the time litigation is commenced to enforce the loan documents against the borrower and/or the collateral.

Given the common practice of banks buying and selling loans, we conclude that it is normal business practice to maintain accurate business records regarding such loans and to provide them to those acquiring the loan... Therefore, the bank need not provide testimony from a witness with personal knowledge regarding the maintenance of the predecessors' business records. The bank's reliance on this type of record keeping by others renders the records the equivalent of the bank's own records. To hold otherwise would severely impair the ability of assignees of debt to collect the debt due because the assignee's business records of the debt are necessarily premised on the payment records of its predecessors.

The testimony of Beal Bank's manager that the opening balance of the loan when it was acquired was established by a spreadsheet received from the assigning bank, was sufficient evidence of the opening balance under the "business records exception," according to the Supreme Judicial Court. Judgment of the trial court was affirmed.

Although binding only in Massachusetts, this opinion is likely to have influence in other states, inasmuch as this is a not uncommon problem.

US District Court Judge Rips FDIC

In the most strongly worded -- OK, vicious -- lambasting of a federal government agency I have ever read, U.S. District Court Judge Lynn Hughes in Houston calls the Federal Deposit Insurance Corporation "corrupt," "liars" and other terms of endearment.

From the introductory paragraph:

      This is a cautionary tale where the emperor has new clothes -- a bandit's mask. The Federal Deposit Insurance Corporation sought to hold Charles Hurwitz individually responsible for all losses at United Savings, even though he had no obligation to the thrift or the government. Unable to focus its claims and unwilling to disclose its records in this suit -- one that it brought -- the FDIC surreptitiously paid another agency to bring a parallel administrative claim against Hurwitz, several companies, and other people. Later -- much later -- the FDIC dismissed its claims here. Hurwitz and two companies have have asked that they recover their costs of defending the suit. They will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation.

To its concluding paragraphs:

         As George Barnard Shaw said, "power does not corrupt men; fools, however, if they get into a position of power, corrupt power." These people discarded the mantle of the American Republic for the cloak of a secret society of extortionists. If the vice president called, they responded. If a congressman called, they responded. If a lobbyist called, they responded. They answered every call but that of duty and honor.

        The agency became more of a cosa nostra than res publica.

The Judge hit the FDIC with $72,255,147.51 in sanctions. The 51 cents is a nice touch.

Read all about it in the August 23, 2005 opinion of Judge Hughes in the case of  FDIC vs. Hurwitz, found through Houston attorney Tom Kirkendall's blog "Houston's Clear Thinkers." Click on a link in the article to "this 133 page broadside" and a pdf file can be viewed or downloaded. Tom's commentary, some of it based upon his personal encounters with Hurwitz counsel and his years as a trial lawyer in Houston, also add background.

Sure, the opinion is 133 pages, but they're short pages, and filled with interesting details and the Judge's entertaining skewering of a government agency he obviously believes ran wild. It's got the best of banking regulators, Clinton Administration operatives, and moonbat tree huggers, all rolled up into a conspiracy of dunces who ran into a Texas businessman they tried to steamroll, and who would not only not back down, but who came back with all guns blazing. When the government tried to drop all claims against him, he refused to drop his counterclaims against the government, and he hit the jackpot. The Judge also ruled that if, on appeal, the Fifth Circuit Court of Appeals overrules the sanctions, the FDIC must still pay Hurwitz over $15 million in legal costs. It's going to hurt no matter what happens on appeal.

Every time people start screaming about "activist judges," they need to remember that in some cases, the only shield you may have between a government of thugs and the rule of law is a solitary man or woman dressed in a black robe. Christians believe that Jesus sits at the right hand of "The Father," but my guess is that Jesus feels the gentle prodding in his right ribcage of a Federal District Court Judge's elbow trying to nudge him aside.

In this case, as well as others I've been privy to over the last few decades, it's apparent that the founders of the Republic did a damn good job with checks and balances. It's far from a perfect system. It's just better than all those other systems.

Bank Blogging: The Risk of Allowing Comments

As banks get into the wide world of blogging (even the World Bank now has a blog), those damn lawyers threaten to ruin it for everyone. The Language Artist has an interesting post about the legal risks of blogging, with links to several interesting articles on the topic.

As one commenter to one of the articles succinctly puts it: "Lawyers = Value Destroyers."

Not always, but often enough. And remember: lawyers need clients. It's the client that sues. The lawyer is just the vehicle that helps the client do that. If lawyers didn't exist, then everyone would just have to be a litigating jerk. The way it is, there's a special class of jerks that do the dirty work for everyone else.

OCC "Favoritism" On SARs Violations?

As reported in the South Florida Business Journal, some Florida bankers are suspicious that the OCC is showing favoritism to certain "megabanks" when it comes to violation of money laundering and other suspicious activities monitoring requirements. These reports first surfaced in June in an article in the American Banker daily newspaper (paid subscription required)magazine, which alleged that Wells Fargo got off with a slap on the wrist (in the form of a private letter) from the OCC, which smaller banks, especially in the Southeast, received more formal Cease and Desist Orders, which are a matter of public record. The OCC refuses to comment publicly.

However, the article in the South Florida Business Journal notes that in a public meeting with bank regulators scheduled for today, also being "Webcast," Florida bankers intend to raise the issue again. We'll see if they get any further response. It's doubtful.

Suspicious activity reports are a hot button, especially in light of the "War on Terrorism," the Patriot Act, OFAC, and other related requirements. Obviously, the bank regulators are focused on this area.

The issue of "favoritism" shown by regulators to big banks is also a recurring charge, one that the regulators consistently deny. The OTS is also accused of favoring Washington Mutual, its largest regulated entity, because the OTS appears to be dependent on the fees paid by its largest savings institutions.

After doing this for a few decades, I've come to the personal conclusion that "favoritism" is in the eye of the beholder. The big banks, being big, have more (and, generally, more sophisticated) compliance personnel whose sole function is to ensure that the bank complies with the complex network of laws, regulations, policies, guidelines and rules that govern an amazingly intricate (and sometimes baffling) commercial and consumer banking system. These people are often as knowledgeable (and in some cases, more knowledgeable) about the regulations than are the regulators themselves. They customarily work with the regulators more frequently than compliance personnel at smaller banks, particularly on "cutting edge" issues that big banks deal with more frequently than smaller banks. They develop a more personal, cordial relationship simply as a result of more frequent contact. Thus, when a regulatory problem arises, the big banks' compliance personnel know how best to respond to the problem and "minimize the damage."

"Money talks," as it does in so many other areas of commerce, and it's not the result of any "nefarious practices" or "favoritism." Big banks often (if not always) simply deal with the regulators better than do smaller banks. I don't believe that it's a case of picking on the little guys siimply because they're little.

Banks' Fees Rise Along With Consumers' Ire

Chris Hoofnagle, Director of EPIC West, has an interesting post that details press reports over the last few years that document the rise of bank credit card, debit card, ATM and other fees, particularly those related to late payments, overdrafts, bounced checks and other "penalties." I think it's been well documented that such penalties as overdraft fees have caused the bank regulators concern that they are being properly assessed by banks and that banks properly disclose them to consumers.

EPIC West is the West Coast branch of the Electronic Privacy Information Center, a pro-privacy advocacy organization, and Chris approaches the problem as a failure of the banks to realize the alleged benefits of looser privacy information sharing permitted by the Gramm-Leach-Bliley Act. I think that's a fair comment, but would argue in return that G-L-B imposed upon banks regulatory requirements with respect to information privacy and security that have substantially increased the cost of doing business for financial institutions, and that those costs are, as always, passed along to customers, banks not being "not-for-profit" businesses. G-L-B also brought to consumers those wonderful annual "privacy notices" that few consumers read and those that do suffer from that eye-glazing numbness caused whenever lawyers draft anything. In addition, the alleged savings to banks from G-L-B were to come not only from information sharing (although that was admittedly a "selling point"), but by the ability of banks to expand and "rationalize" their services across many business lines. That promise, too, has yet to be fully realized. I don't think that you can call out banks on the issue of higher fees principally on the basis that information sharing, alone, has not lowered bank fees.

There is contrary evidence that indicates that the growth of late payment fees on credit cards has slowed dramatically over recent years. Over the past five years, late payment fees have risen 20%, compared to a 104% rise in the previous five years. Nevertheless, the same data source notes that late payment fees in 1994 averaged $12.55 and in 2004 averaged $32.61 (with the highest being $39.00), so the level of these fees is not inconsequential.

The law school professors at PrawfsBlawg jump all over banks for these fees (and ATM fees, which also annoy me) principally because they believe they are "excessive" (always a tricky accusation because it's then a personal judgment call as to what's "just right"), and that they disproportionately affect the poor, the group least able to afford them. One commenter even hints at an argument that such fees might violate the Americans With Disabilities Act because disabled people "are overwhelmingly poor" (I'll defer to her supporting data, since I have none to support or challenge that assertion), which is, in my opinion, stretching it a bit; however, it's the kind of "trash talking" that can makes bankers shudder.

As my profile indicates, I represent banks. Having said that, I, too, admit that the increased charging of these fees by banks also concerns me. I agree that overdraft, late payment and bounced check fees disproportionately affect poorer Americans, simply because they tend to be the type of people who most often cannot pay their bills on time or who write overdrafts on their checking accounts. The critical issue to me, however, is that consumers be adequately informed about these fees before they use the services. Knowledgeable consumers should have the right to incur these fees in return for the use of the services provided by the bank (for example, covering the amount of a check for which the consumer's account does not contain the necessary funds). In a free market economy, the point is not to be defrauded. If you know what the rules of the service are before you agree to use the service,  you shouldn't be able to complain that those rules are being enforced. If your argument is that the poor are too stupid to make informed decisions, that disclosure is irrelevant, and that these fees need to be severely curtailed or prohibited as a matter of "fairness," then I'd have to reject that argument. But, then, I'm a running dog lackey of capitalist blood-suckers, so you'd expect that from me.

The underlying economic problem for the banks is the flat yield curve. It's frankly without precedent (outside of a recession), or at least that's what my bank and hedge fund clients tell me. I defer to them on such matters, because I'm merely their mouthpiece with no mind of my own. However, assuming that this is true, banks can't make nearly enough money making conventional loans for the simple reason that the spread between what they pay to borrow the money (for example, by issuing a certificate of deposit to a consumer) and what interest rate they can charge on a loan they make with the funds borrowed, isn't enough to cover operating expenses, much less make a profit. That's the problem when the spread between two- and ten-year bonds is 20 basis points (0.02%), and the spread between two- and thirty year bonds is 40 basis points (0.04%). Thus, there has  been increasing pressure on banks to increase fee income, from whatever sources are legal.  The fees charged are legal. The banks are trying to make money. It's what they do.

Of course, haters of banks will be pleased to know that they eat their own. I recently received a bill from my bank for an annual $20 fee to renew a business line of credit. The fee was charged to my line of credit, and the terms of the line provide that interest accrues from the date of the advance. Thus, the bill also included an interest charge of $0.06. I paid that amount the date I received the bill. The next month, I received a bill for $0.03, which represented interest on the $20.06 amount that had accrued between the date the amount was advanced until the date payment was received. Even at bulk mailing postage rates, it had to cost the bank more to process and mail that bill than the $0.03 they charged to me. I drove to a local branch of the bank, handed a teller three pennies, and demanded a receipt. She was as mystified as I as to why the bill was sent, but complied with my request. The next month, I received a statement showing that no balance was due on my account. How much did that bill cost to generate and mail? Classic!

So, whether you represent them or oppose them, banks don't try to single out the poor to screw. In terms of squeezing income out of customers, they are are equal opportunity hosers.

UPDATE: For further discussion of the negative effect of the flat yield curve on banks' earnings, read here, and for the importance of fee income, read here.

UPDATE II: My apologies to EPIC West and PrawfsBlawg for the multiple tracbacks. Ineptness married to haste is always deadly.

Texas Mortgage Loan Officers Required To Become More Educated

Some of my clients who are in the mortgage lending business sometimes kid me with the observation that mortgage lenders keep lawyers off the bottom rung of the public opinion polls of "the least respected profession." I tell them that we still have politicians to make all the rest of us look good. There's no doubt, however, that the explosion in the residential mortgage business over the last several years has brought into that business some loan officers who, to be charitable, might not be as fully trained and/or experienced as their older, more experienced brethren.

Apparently, the Texas legislature felt the same way. In its most recent regular legislative session (not the current second special session focused on school finance and property tax reform, which is shutting down today without having passed the necessary legislation), the Texas legislature in June passed SB 988, which makes two major changes in loan officer educational requirements, to become effective on September 1. First, in order to secure a loan officer's license from the Texas Department of Savings and Mortgage Lending (whose name is changed from the "Texas Savings and Loan Department" on the same day), an applicant will have to complete 30 (up from the current 15) hours of educational courses, which must cover ethics, the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act, the Equal Credit Opportunity Act and the provisions of the Texas Finance Code that apply to mortgage loan officers. Also, loan officers will be required to attend at least 8 hours of continuing education courses related to residential mortgage lending prior to renewing their yearly license.

As someone who has to take not less than 15 hours of continuing education courses a year, I tell my clients that I have little sympathy for these new requirements. Certainly, the fact that mortgage loan officers ought to be familiar with the basic laws that regulate their conduct and govern the residential mortgage loan transaction in which they engage with consumers (most of whom are much less knowledgeable on the subject matter), would seem to require such continuing educational requirements. Courses on ethics certainly won't hurt them, either. In fact, they can point to the educational requirements as a counterpoint to public criticism of their profession caused by stories like this one.

The fact that many of these folks (not all, but many) earn in the six figure range (and some even higher), a little time spent on education is small price to pay for increasing the public's trust.

Of course, mortgage lenders could point out that continuing education requirements have done nothing for lawyers' reputations, but then we've been enraging people since before Shakespeare suggested that the first thing to do is to "kill us all." Mortgage brokers have been around as a profession for only 50 years. There's still hope for them.

E-Sign Does Not Require The Use of Electronic Signatures

Many banks require that certain actions of its customers must be in writing. As one example, a bank may require in its account agreements that a business customer may change the customer's designated authorized representatives only by means of a writing signed by an authorized officer of the customer. Does the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §§ 7001-7006 (“E-Sign Act”), require the bank to accept an electronic signature or an electronic document such as an e-mail message or a facsimile transmission in lieu of a "writting"? I never thought so, and I'm happy to see that at least one U.S. District Court judge agrees.

In the case of The Prudential Insurance Company of America v. Prusky, a father and son engaged in market timing with respect to the investment of certain premium payments under life insurance contracts. Although the insurance company accepted transfer orders from the insured by fax or e-mail, it changed its policy, gave the insureds notice, and refused to accept faxed or e-mailed transfer orders from the insureds in the future. The insureds sued alleging. among other grounds, that the E-Sign Act required the insurance company to accept electronic and faxed transfer orders.

The E-Sign Act provides that:

(1) a signature, contract, or other record relating to such transaction may not be denied  legal  effect, validity, or enforceability solely because it is in electronic form; and (2) a contract relating to such transaction may not be denied legal effect, validity, or  enforceability solely because an electronic signature or electronic record was used in its formation.

15 U.S.C. § 7001(a)(1)-(a)(2).

The District Court held that "the use or acceptance of electronic signatures is not mandatory," citing the provisions of Section 7001(b)(2) of the Act, which states: "This title does not...require any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party." The E-Sign Act was designed to permit electronic contracts to be treated as legally enforceable as are written contracts. It wasn't designed to force banks and other businesses to "go electronic."

That was always my understanding of the plain meaning of the statute. On the other hand, if you take one or two sections out of context and try to make a case out of it, you might come to a different conclusion.

Phishing, Faxing and Spoofing

In yet another variation of the "phishing" scam I blogged about last week, e-mail fraudsters are sending e-mail warnings that appear to come from PayPal, security specialist Sophos said Wednesday. These e-mails say that someone tried to reset the recipient's password and asks him or her to participate in an investigation. The e-mails direct people to a Microsoft Word document hosted on a Web site and urges them to download the form, fill it out, and fax it to a toll-free number, Sophos said. The form asks for credit card information.

According to technology consultant Graham Cooley, "[i]t seems like a dumb way for the phishers to operate. The authorities can easily track the phone number. But what isn't clear is whether they will get a (toll-free) number and then quickly dump it, or (whether they've) acquired the number using a false ID, or can have the calls transferred to a satellite phone somewhere outside of America."

Interestingly, Sophos asserts that pure e-mail phishing scams are becoming less useful, while Trojan horses and worms are becoming the weapons of choice by online scammers, since personal information can be stolen "surreptitiously." That seems to contradict the results of the Gartner Group study profiled in my previous post, which found that phishing attacks are on the rise.

Another popular scam is "spoofing," in which a fraudulent web site is set up by criminals, often appearing to be the legitimate web site of the bank. As explained in this OCC Bulletin issued last month on the subject, customers are usually directed to these sites either through phishing or "pharming" schemes ("pharming" involves exploiting technical vulnerabilities to redirect users in large numbers to bogus sites). Once at the site, the customer then assumes he is dealing with the actual bank and often gives personally identifying information to the crooks, which they in turn use to fraudulently purchase goods and services.

The OCC Bulletin (OCC 2005-24) offers guidance to national banks on the detection of, and response to, "spoofing" attacks. Banks should familiarize themselves with this guidance to insure that they have established proper policies and procedures (including assigning and training appropriate personnel) to deal with these incidents. Moreover, banks should ensure that vendors to whom Internet banking activities are outsourced are required to deal appropriately with these attacks and that the vendor's procedures and the bank's procedures are properly integrated.

It's apparent that these types of scams are not going away. They'll only mutate into other variations that will continue to plague bank customers.